Sales compensation is the ultimate balancing act. You need to find a way to keep the sales team motivated, the finance team onboard with the payout process, and the operations team happy with the day-to-day management.
Despite the many stakeholders, the most contentious relationship is often between the sales and finance teams. By nature, they have conflicting priorities. Sales teams are focused on growing revenue in the here and now. Finance is focused on the long-term goal of making sure the company retains a healthy business model.
These opposite approaches often come to a head around sales compensation. The sales leader wants to motivate their team with commission payouts that come as soon as possible while the finance leader wants to manage company cash flows to optimise their working capital. It’s at this point the finance leader may push for deferred sales compensation.
Deferred sales compensation is the practice of paying a commission on a recognised sale after the initial booking has been made.
This can have several different forms. As a simple example, booked deals can be paid out after a specific delay. Let’s say that your sales team member closes a deal on July 1st. If your sales compensation plan defers payment by two months, they’ll receive their commission on September 1st.
Now, that’s a basic example. Many other triggers can be used to release commission payouts depending on your industry, sales cycle length, and sales process. Some other common triggers include:
From a finance perspective, the deferred approach to sales compensation sounds pretty cut and dry. We don’t pay commissions until we get to a point in the process where the customer’s payment has already arrived (or we’re confident it will be arriving). But, finance isn’t the only stakeholder here.
The sales team are going to be the ones most affected and deferred sales compensation can be a big demotivator if it’s not done right.
When it comes to sales, organisations want to reward the right sales efforts in a timely manner. While deferred compensation gets the reward part right, it doesn’t necessarily hit the “timely manner” criteria.
Sales’ ideal situation is to get their commission instantly after booking a deal. Instant recognition and payout help them connect the reward with their hard work, motivating them to chase it again and again. However, from a finance perspective, it’s obvious why this isn’t the best approach. Paying out compensation quickly can put the company in a precarious financial position, especially if invoices take months to be paid, and can lead to time-consuming, morale-killing clawback processes.
Each team is after different things. The sales team wants to see the reward for their accomplishment (important note: see their reward not necessarily receive it) and finance wants to pay out commissions when they’ve received the payment (or are confident enough that they will receive it soon).
You can address both these priorities by breaking down the deferred sales compensation process into two components: visibility and payment.
We mentioned that in a salesperson’s ideal world, they’d get their commission for booked deals almost instantly. Despite this, the reality is that most salespeople don’t rely on frequent commission payments to cover their personal life expenses. There’s an implicit understanding that there will always be some kind of delay.
What they do want instantly is to see that they’ve closed a deal and how much commission they’ve earned from it. It’s the visibility of the achievement that connects their effort with their sales reward. This is the actual driver of a sales team’s motivation.
This realisation is critical to making deferred sales compensation succeed with your sales team. The commission can be deferred, but recognition of each deal needs to be made visible quickly for motivation to stay high. For deferred sales compensation to work, you need to implement a system (which can or cannot include an incentive compensation management solution) that gives your sales team full visibility of their closed deals, targets, quota achievement, and commission payouts.
It’s the visibility of the achievement that connects their effort with their sales reward. This is the actual driver of a sales team’s motivation.
If you’ve done a good job tackling the visibility challenge, you’ll be able to implement a deferred sales compensation payout plan that keeps both finance and the sales team happy. With the sales team off the finance team’s back, finance will have the opportunity to put a deferred sales compensation payout plan in place that aligns with the financial position of the company.
In short, the finance team will say when commissions get paid. So, how should it work?
Let’s use an example to illustrate the process:
Company X uses NetSuite as their financial management platform, Salesforce as their CRM, and Amalia.io as their sales compensation management solution. The CFO wants to pay out commissions on customer payment to better manage their cash flows, but the Head of Sales is concerned about hurting sales team morale.
Luckily, they can both get what they want.
First, they should connect Amalia with Salesforce, bringing in all their sales data and allowing Amalia to give the sales team visibility on their targets and closed deals. Then, NetSuite can be connected to bring the company’s financial data and sales data together.
When a salesperson logs a closed deal in Salesforce, the data will automatically be sent to Amaila where their commission will be calculated, their quota achievement updated, and the closed deal displayed. This lets the salesperson see their sales effort rewarded, keeping them motivated.
When finance receives payment of the invoice, a trigger will initiate the release of the commission for the salesperson and the commission payout status will be communicated through Amalia. It’s a win-win!
Implementing a deferred sales compensation approach is fraught with potential pitfalls. But, as you saw above, you can find balance. When you do, you should expect:
The biggest risk of deferred sales compensation is killing sales team motivation. If you give them visibility and recognition of their booked deals instantly (or at least quickly), you’ll make a clear connection between their sales effort and their sales reward. That connection is a major driver of motivation. If they know they’re recognised and rewarded for their effort, they're going to keep chasing them.
On the financial side, deferred sales compensation can take some pressure off of the company’s finances. The organisation will have the opportunity to set the commission payout trigger that aligns with its current financial position. And this can be fluid.
In high growth periods, finance may be happy to pay out commissions when the invoice is sent to incentivise as many deals as possible. In downtimes, they may prefer to pay out on customer payment to retain cash that will help the company weather the storm.
When setting their deferred sales compensation plan, many will find that the tools and processes they put in place provide them with the opportunity to streamline and automate their sales, sales compensation, and finance processes. This can lead to a reduction in manual work, freeing up multiple people on the sales, operations, and finance teams to spend more time on strategic, value-added initiatives.
Finding a balance between motivating the sales team and maintaining a healthy financial position is the key to successfully implementing deferred sales compensation. By focusing on visibility and payment, a well-designed deferred sales compensation plan can satisfy both teams.
The sales team gets visibility on their achievements, connecting their sales efforts with sales rewards. The finance team, on the other hand, gets the flexibility to set and adjust commission release triggers based on the company’s financial and strategic position. In the end, you can get the best of both worlds: a highly motivated sales team, a finance team with the ability to better manage sales expenses, and an overall more efficient, transparent sales compensation process.
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